What Is Wrong With Gas Prices Today? Term Paper

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What is wrong with Gas Prices?

I am afraid, not many Americans will agree with my point-of-view, when I submit that what is wrong with gas prices is that we have become used to low gas prices. I believe that higher energy prices will benefit United States and our planet in many ways, and I for one would be willing to accept the sharp shock that high energy prices will deal to the gas guzzling ways we, the Americans have taken far granted. (Ferguson, 2006) in an article in the Telegraph joked that if gasoline reached $3 per gallon in United Kingdom, people would be queuing from Beaconsfield to Brighton to buy it. When the price of gasoline hit $3 per gallon in parts of United States, the price in England was 98 pence per liter or $6.63 per gallon. The truth is that even if the gasoline prices had kept with the inflation over the years, the real price now would be more like $4 per gallon. In 1980, the gasoline was priced at around $1.25 per gallon. The price of a typical new car was around $8,000 and the price of a new house was around $80,000. The prices of these items and others are typically four times these figures now. If gasoline prices had just kept with the inflation we would be paying nearly $4 a gallon now.

In October 2004, when crude oil reached $55 per barrel, Mr. Greenspan, the then Chairman of Federal Reserve reminded us that that even at that level, "crude oil prices are still about 40% below the all-time highs - in inflation-adjusted terms - of February 1981" [Crutsinger, 2004]

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Analysts even argue that high oil prices are good, on the principle that they send a signal to producers and consumers that it is time to seek new sources of energy. Until 1973 energy crisis, the oil was dirt cheap. U.S. influence in the Middle East made sure that prices stayed at a low level. In those days Iran was an American ally and pro-U.S. Saudi Arabia which had a capacity to produce 11 million barrels a day was used to regulate the supply and hence the prices in the international market. It made us used to cheap supply of oil on one hand but on the deficit side it made oil exploration uneconomic.

TOPIC: Term Paper on What Is Wrong With Gas Prices Today? Assignment

Arrival of OPEC on the scene and political upheaval in Iran disrupted the oil prices for a while but $9 barrel crude oil supply resulted in many a new finds. North Sea Oil was tapped after the 1973 crisis as the cost of extracting oil from deep sea was around $8 a barrel and $9 per barrel made the extraction economically viable. Of course soon after wards prices rose even higher and North Sea Oil became positively profitable for the region. The first lesson we learn from this is that reasonable price of oil will help exploration and will make more oil available to the world..

United States with 5% of the population of the world has been consuming 30% of fossil fuel resources of the world. The industrial progress in the newly developing countries such as China, India and South East Asia has created huge oil demand in those countries. These developing countries would be competing for a limited resource with the developed countries and the oil prices would continue to show an upward trend in the foreseeable future.

We have to appreciate that oil is a finite resource. The doomsday forecasters have been predicting that oil will run out since the mid 1960s. An ESSO report, Report for the UN Conference on Human Environment, UK Department of Energy, Shell and World Bank claimed in early 1970s that "Oil will become increasingly scarce from the year 2000" and that it was "likely that peak production will have been reached by the year 2000" [Production and the Hubbert Curve, 2006].

The forecasts were based on incorrect information and those remembering the forecasts but unaware of the difference between oil peaking and oil exhaustion, assumed that all the predictions were that oil would run out by 2000. Oil did not run out in 2000, neither did it peak that year.

The reserves have continued to grow but some of this increase is not due to new discoveries. Reserves of oil are the quantities that can be economically recovered. When the price of oil was $6-7 per barrel, it was uneconomic to extract North Sea Oil, when the price of oil grew to beyond $9 per barrel that oil became viable. These figures seem laughable now, but just like North Sea Oil extraction, continued increase in oil prices have made more oil available to the world and there is every reason to believe that higher oil prices will allow us to go deeper into the ocean and develop technologies to recover oil from vast under sea resources not yet explored.

Before the War-on-Iraq crude oil prices hovered around $22-25 per barrel. In the aftermath of Iraq war prices rose to around $40-50 per barrel. The present Iran nuclear issue, belligerent postures by Central and South American oil producing countries and no end in sight to Iraq conflict have sent the price to $70+ per barrel. Is this a boon or a bust for United States economy? My thesis is that higher oil prices are in the interest of United States. Higher oil prices are here to stay and even if the present political turmoil comes to an end, the oil prices will only show a temporary drop but will recover soon due to high oil demand in the developing countries.

It is in United States interest to begin to adapt to the new realities. I believe that higher oil prices will be good for United States and the world, as this will force us to improve energy utilization efficiency, reduce global warming emissions and perhaps make implementation of Kyoto Protocol a viable option.

Reducing the energy prices for political reasons requires removal of taxes on petroleum products but this would make it cheaper for the individuals and not for the government or oil companies. We will use it more inefficiently and the oil reserves would decline more rapidly. As oil becomes more and more expensive, there would be no more taxes to cut and as the governments have to get their revenue from somewhere, people would not actually benefit from cut in petroleum taxes as they would be paying taxes on something else. Reducing taxes to reduce gasoline prices is no solution at all.

With this introduction we can now proceed to the objective of this study and that is to establish that higher energy prices are not necessarily bad for United States. In order to do that we need to:

Establish the impact of international oil prices on the price at the gasoline pump

Analyze the negative effects of higher fuel prices on the economy

Assess possible political impact of higher energy prices

Discuss the potential benefits of higher energy prices

Evaluate the overall impact of higher fuel efficiency

Review the environmental impact and effect on Global Warming

Judge public opinion on continuing with higher energy prices thorough a representative survey

Crude Oil Prices and its Impact on Gasoline Prices

We need to have someone to blame for higher energy prices and the political turmoil in the Middle East is a good scapegoat. Our European allies and generally the world would blames this on incorrect U.S. policy as war-in-Iraq has gone terribly wrong and search for secure oil supplies has resulted in what seems to be a prolonged insecurity. The present oil prices of $70-73 per barrel are not necessarily the highest expected. The oil analysts were forecasting crude oil to reach $100 per barrel if the demand continues to grow at the present level.

The Energy Information Administration [EIA, 2004] publishes a Petroleum Supply Annual every year. The data includes the average distribution of various components in gasoline costs. The latest available data at present is for 2004 which shows that at an average price of $37 per barrel in 2004, the crude oil accounted for 47% of the fuel price at the pump. We estimate that an average crude oil price of $74 per barrel would make the contribution of crude oil price to gasoline price close to 60%. While remaining 40% would be accounted by the distribution and marketing, refining costs and profits and Federal and State Taxes. This is a large change. A sustained price increase of this magnitude would make people more conscious of how to use their SUVs and other Gas Guzzlers.

Break up of Gasoline price [Reference: EIA, 2004]

At present just the real cost, taxes and seasonal fluctuations are being passed on to the consumer. The taxes are so low that we do not have to pay anywhere near the prices being paid by our European friends. A price differential of $6.60 per gallon in UK and around… [END OF PREVIEW] . . . READ MORE

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